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Revised IMA Remuneration Principles 2014

The IMA published the 2014 version of its Principles of Remuneration (the Revised Principles) on 20 October 2014. The Revised Principles replace those published last year (the 2013 Principles) by the Association of British Insurers, with whom the IMA merged in June 2014.

Companies that adhere to the IMA's guidelines (whether companies listed on the London Stock Exchange, or AIM companies that comply voluntarily) will be relieved to find few substantive changes since the 2013 Principles, following on from wider changes to remuneration matters last year.

Revised Principles – summary of changes

The one substantive change is the inclusion of a statement that the use of allowances as part of fixed pay "goes against the spirit of simplicity, clarity and pay for performance". The use of such payments should be "clearly justified and explained within the context of the overall remuneration package". This statement reflects growing concern from various parties, including the European Banking Authority, that role-based fixed allowances are being used by financial institutions within the EU to circumvent the so-called 'EU bonus cap'.

There are two other minor updates. The first sets out the IMA's views on the new remuneration reporting regime which has now been in place for a year (the Reporting Regulations): disclosure of the Policy Report on an annual basis is now described as "helpful" to shareholders, rather than merely "beneficial". Under the Reporting Regulations the Policy Report is only required to be disclosed and approved every three years, so the IMA is continuing to encourage additional transparency.

The second relates to the remuneration of new directors. The 2013 Principles stated that shareholders would not support excessive limits on remuneration within recruitment policies; the Revised Principles emphasise that no limit is equally unacceptable.

Letter to Remuneration Committee Chairmen – areas of concern

The Revised Principles are accompanied by a letter from the IMA to chairmen of Remuneration Committees, which provides helpful background to the changes – or, indeed, the lack of changes – in the Revised Principles.

The IMA highlights areas of particular concern which were already included in the 2013 Principles, and which are likely to continue to be closely scrutinised by shareholders going forward. These are:

amounts and gearing of variable pay – in normal circumstances, basic salary increases should not exceed inflation or the increase for the general workforce, and reasons for increases should be clearly explained;

amounts payable when threshold performance is achieved – the absolute amount that vests on threshold performance will be scrutinised, as well as the percentage of the award;

length of performance and holding periods – performance periods should be linked to business strategy and be no less than 3 years, and additional holding periods may be appropriate; and

retrospective changes to performance conditions – IMA members do not support such changes, even if exchange rate fluctuations have affected the outcome of profit-based performance conditions.

With regard to AGMs that took place last year, the IMA notes that its members were "generally positive about how the first AGM season has progressed under the new Remuneration Regulations", and that there was a "good level of engagement between companies and investors".

However, the IMA notes that several companies received a "significant negative vote", and suggests the following measures would improve the remuneration engagement process:

companies should make clear whether they are consulting shareholders or merely notifying them of a change;

shareholders should be consulted as early as possible, to facilitate consideration and feedback;

full details of proposals should be given during consultation; and

companies should send a "wrap-up letter" after consultations close, setting out what has been decided.

The IMA also emphasises the importance of retrospective disclosure of annual bonus targets, and notes that public assurances on the operation of remuneration policies in advance of AGMs are helpful to shareholders, and that details of such assurances should be included in the following year's Remuneration Report.